Earlier today I gave a presentation for Blockchain University hosted at PricewaterhouseCoopers in San Francisco. It covers the different startups developing permissioned ledgers, the use-cases they are looking at and the reasons for why permissionless systems are currently inadequate to fulfill similar business requirements.
A couple weeks ago I was interviewed on Epicenter Bitcoin. Below is the video from that episode. We covered a number of topics surrounding permissioned ledgers and cryptocurrencies.
This post will look at an amalgam of ideas touched on by Eli Dourado in a post several days ago regarding Bitcoin. This includes volatility, cross-border payments, nemo dat, settlement finality and machine-to-machine transactions.
I also answered a few frequently-asked-questions that have been emailed to me that intersect with some of the same ideas.
I don’t want to turn this into a post solely on volatility so if you’re interested in other ideas, skip to the next section titled cross-border payments.
The problem with Dourado’s analysis on volatility is that it does not look at what the actual causes of volatility are, the core of which is a perfectly inelastic money supply.
What does it mean to have a “perfectly inelastic money supply”? In short, irrespective of the quantity demanded, the money supply itself does not change or shift. For a Bitcoin-like network, its supply is programmed to remain static irrespective of external conditions. While some advocates and enthusiasts consider this a feature, it is a bug if bitcoin wants to be used as a modern medium-of-exchange. Why? Because the only way to reflect changes in demand is through a change in price, which as described below, is done so via volatility, often violently.
And consequently, determining what the elasticity of demand could be is effectively impossible due to the opaqueness in both the exchange and OTC markets, which partly explains the unpredictability around cryptocurrency prices in general.1
In contrast to Dourado’s view, Robert Sams recently provided a more cohesive look at the fundamental reasons for why, despite the creation of new “liquidity” venues, uncertainty cannot be removed in a similar manner:
The three slides above appear in an April 2015 presentation by Sams.
Yet it is Sams’ short white paper on stable coins that probably, succinctly, describes the issue of future uncertainty with present day prices:
It is the nature of markets to push expectations about the future into current prices. Deterministic money supply combined with uncertain future money demand conspire to make the market price of a coin a sort of prediction market on its own future adoption. Since rates of future adoption are highly uncertain, high volatility is inevitable, as expectations wax and wane with coin-related news, and the coin market rationalises high expected returns with high volatility (no free lunch).
In other words, at present bitcoin’s price inelasticity of demand means bitcoin’s price isn’t a function of the availability of bitcoin or, for that matter, demand for it. This makes bitcoin vulnerable largely to the machinations of prognosticators (e.g., pumpers), not tangible market forces.2
Below are a few other questions that have hit my inbox related to volatility which tie into the ideas addressed by Dourado and others above.
Some short Q&A on volatility and prices
Visible volatility appears to have declined in the past 5 months, why?
One possible explanation relates to the inelasticity argument: if traders “feel” that this is a good price and there is no motivation or incentive to trade, thereby moving it up or down, it will tend to stay there (i.e., trading based on sentiment).
Another potential explanation for why there has been less volatility in the last couple months could be that as participants have left the market, there has been less demand from speculators due to a lack of interest and thereby a corresponding lack of volume.3 We may not know for sure what the actual trading volume is at exchanges in aggregate for years to come.
For instance, contrary to the Goldman report, the Chinese RMB does not compromise 80% of the trading volume; this “volume” as discussed by Changpeng Zhao (former CTO of OKCoin) were a combination of internal market making bots, wash trades and tape painting.4 If there was a legitimate increase in demand from speculator then there would have been corresponding increases. Maybe “whales” will return again after Fed tightening or concerns over Greece. Or maybe not.
In addition, VC funded companies like BitPay are stating on record that they absorbing some (all?) bitcoins onto their balance sheet, this likely in the short run reduces some of the volatility but is not sustainable.
Because with roughly $400,000 – $800,000 in trade volume per day that BitPay processes, it simply does not have the cash on hand to absorb all of the incoming bitcoins for more than a few weeks at most. Thus, despite the claims (video) from Jason Dreyzehner — that BitPay tries to keep all of the bitcoins that they process — after talking with several contacts at large exchanges, it turns out BitPay does in fact sell bitcoins in bulk to exchange and OTC partners. See also, A pre-post-mortem on BitPay.
Another common question I have received: with a string of “positive” developments lately such as GBTC, new exchange infrastructure, and more VC funding, why hasn’t bitcoin’s price risen?
It hasn’t risen in part because of elasticity. Bitcoin’s value can be susceptible to external factors, but it does not need to be if there is inelasticity of demand. In that case, steady prices amounts to Newton’s First Law.5
In addition, thus far there is no compelling reason for:
1) Consumer-based transactional demand. To most consumers in developed countries, trying to use bitcoin is an added friction, so they are not interested in doing that. What are the demographics of a bitcoin owner? Based on several sources we know what the owner demographics are: a North American / European male in his early 30s, they have access to other payment platforms and own bitcoins primarily as an investment, not virtual cash.6
2) Speculative demand has not increased (yet) because it is now an old story for some active traders — they know what a “bitcoin” as an asset is and how to get it. As Nathaniel Popper (from NYT) discussed a couple weeks ago at Plug and Play, editors and writers at large media companies are tired of the same stories, these Bitcoin companies need to now go execute which few have actually done.
What about the new exchange companies and liquidity providers being added to the market?
As noted above, as of this writing the price of bitcoin is largely a function of speculative demand still. Companies like Coinalytics have looked at the on-chain data to show that there has not been much of an increase in on-chain usage or demand from above-board commercial entities.7 Perhaps that will change.
Therefore if consumers are not participating, bitcoin is left with movements dictated by changes in the unpredictable demand curve (and appetite) of speculators. There are startups that provide different types of instruments: SolidX, LedgerX, Mirror, Tera Exchange and Hedgy but none has likely gotten much volume and only have limited capital to absorb the continual bitcoin production rate of miners and other sell-side participants. Again, maybe this will change over time.
What if bitcoin adoption were to proceed more aggressively in non-currency applications (real-time securities settlement, for e.g.), what is the impact from that on bitcoin’s price?
First off, the Bitcoin network is not a real-time securities settlement, at most it clears one batch in roughly 10 minutes — not real-time. But if we are truly defining post-trade finality in terms of title transfer, Bitcoin itself cannot do that with off-chain assets. Why not? Because Bitcoin’s validators — in this case mining pools — have no control over off-chain assets. Title still resides and is controlled off-chain, out of the purview of miners.8
Ignoring that for a moment the main reason why watermarked methods have seen a surge in interest is so that a company (or financial institution) does not need to buy gobs of bitcoins in order to represent socially-recognized value on the edges (houses, cars, airplanes, boats) — thus since watermarking takes a small fraction of a bitcoin, even in aggregate it probably does not add much demand to bitcoin itself. Whether that is a secure method for transferring value is another topic altogether.9
On this point I also spoke with George Samman, co-founder of BTC.sx and weekly contributor to CoinTelegraph. In his view:
When talking about settlement and clearing the sheer size – in dollar terms – of the FX and equity markets, it makes a 51% attack on watermarked assets much more of an eventuality than a probability simply because it’s now worth the effort to do so. Why? Because the increase in aggregate asset value transferred on a blockchain incentivizes attacks. In fact a new paper suggests that an attacker does not even need 51% to achieve their goals.
How might Bitcoin help FX traders and arbitrageurs more easily and quickly align their books and execute a global strategy?
As of June 2015, probably none. The market simply is not deep or liquid enough compared to the multi-trillion dollar FX space. Even if we took the volume of Bitcoin exchanges at face value — that operators are not exaggerating their numbers which we know they are10 — you would need volume to increase by several orders of magnitude before FX traders probably are interested in using it either as a vehicle or as part of their “global strategy.”
According to Bitcoinity — which uses self-reported volumes — total global bitcoin trading volume over the past 24 hours amounted to 312,532 BTC (~$78 million), though 70-80% of that is likely market making bots and wash trading. For comparison, according to the BIS, in April 2013 the daily FX turnover globally was $5.3 trillion. This number has stayed roughly the same over the past several years.11
What impact can the BitLicense have now that it has been finalized?
Again, I’m one of the few people that thinks the BitLicense is not a bad thing — it may seem expensive but if a Bitcoin company provides the same good and service as a traditional company then it would make sense to have them liable to the same type of compliance — why do they get an exception just because of the word Bitcoin? With that said I do think that it could bring in more players who believe this now provides regulatory certainty.
For example, I am looking forward to seeing how Gemini impacts the network now that there is a legitimate exchange you can “short” bitcoin on — it may provide a new incentive to destabilize the network in order to gain.
For perspective I reached out to Raffael Danielli, Quantitative Analyst at ING Investment Management. In his view:
The points made in Robert Sams recent post are worth looking at. It is a reason to be wary of a professional exchange such as Gemini. Also it adds to the volatility problem. It is probably just a question of time until we see some hedge fund disrupt the network somehow while profiting from it with a massive short. The incentives will be in place sooner or later.
Honestly, I believe that the misconception about volatility (“it will go down over time”) might blow up in the face of many people. The argument that Robert Sams makes is strong. As long as supply cannot be dynamically adjusted to match changes in demand expectations (essentially what the Fed is trying to do) volatility is unlikely to decrease.
It is worth pointing out that a trader can currently “short” bitcoin on Tera Exchange and Crypto Facilities via their forwards contracts (and swaps in the case of the former). So far the only participants interested are miners for obvious reasons (though it is unclear if anyone involved is generating much revenue yet). It is also unclear what the incentive for doing a swap is too, with the inability to predict or model exchange rate changes months into the future.
I also reached out to George Samman once more. According to him:
It is more about the implied volatility which for bitcoin, is always higher than other asset classes and the reason I believe this is because bitcoin is still a giant unknown. Bitcoin continues to trade mainly on sentiment and technicals as well, and this in turn makes it by nature a more volatile asset.
I would also say to the disappearing volume on exchanges it has to do with a lack of trust, hoarding by deep pockets, and its been going off-exchange. For example LocalBitcoins volume hit record highs in May, while volume at the biggest exchange and the one used by the most active traders use, Bitfinex, has declined steady all year long.12
Kraken, the San Francisco-based crypto currency exchange, is launching a new “DarkPool” option for volume traders who want to buy and sell coins in larger orders. Typically, large orders in the exchange swing the price of bitcoin dramatically, but with the new dark pool trading option, it lets people or institutions order in a way that the rest of the market does not see. Think of it as a level of privacy for people buying or selling bitcoin in bulk. The service will cost users an addition point-one-percent on orders.
Kraken is not the first exchange to bring a “dark pool” to market. In 2013 Tradehill launched a service called “Prime” that purportedly acted as a “dark pool.” In addition, one of the attractions to LocalBitcoins may be that it does not require traders to provide identification (via KYC); its volume could decline if it tried to comply with similar KYC/AML/BSA requirements that many other exchanges do.
Dourado’s explanation for how credit card processing work is not fully fleshed out. For a more detailed explanation I recommend readers peruse two posts from Richard Brown found below in the notes.13 In short, Dourado’s explanation for the alleged value proposition between Bitcoin versus a credit card ignores the biggest difference: there is no native credit facility or lending ability on the Bitcoin network.
At best the comparison should be with debit cards. In addition, in his example, not only is there unnecessary foreign exchange fees in moving into and out of bitcoin, but transactions do not occur instantaneously (even zero-confirmations take longer than a card swipe). Furthermore, the current Bitcoin network is unable to handle everyone wanting to use bitcoin today (there is a continuous backlog of unconfirmed transactions, sometime measuring into the thousands). One thing he could have mentioned is that that foreign exchange trades may offset merchant fees, but he did not (yet).
For instance, Dourado states:
You may use a payment processor such as BitPay to instantly convert the bitcoins you receive into dollars. I may use a wallet that instantly converts dollars to Bitcoin at the time I want to make a payment. We both have trust relationships with intermediaries, but because the transaction and settlement occurs on the blockchain, we no longer have to trust the same intermediary.
There is no reason to use Bitcoin itself to do this. Since users on both ends of the transaction are not only identified but they also need to “trust” a trusted third party, they could just as easily use a different payment method. And empirically they do, hence one of the reasons why JP Koning wrote the first post in the first place. In practice, Bitcoin as a payment system is just an added friction: why go from USD->BTC->USD when a user can simply bypass this artificial friction and pay in USD?
Dourado does not provide a cost-benefit analysis nor does he explain why credit card companies work the way they do (see again Brown’s posts in the end notes). Instead, he discusses the example of unbanked and underbanked, stating:
This is relevant when thinking about bringing the next few billion people online and into the global economy. These people will not have credit histories that are accessible to the same intermediaries that I am set up to use. They may have local intermediaries that they can use, or they may be willing to use Bitcoin directly. If that is the case, they will be able to enter into the stream of global commerce.
In my lengthy book review on The Age of Cryptocurrency I explained 3-4 reasons for why Bitcoin probably is not the savior of the unbanked and underbanked.
One of the reasons is volatility, another is compliance and customer acquisition costs.
One more is the fact that nearly all venture capital (VC) funded hosted “wallets” and exchanges now require not only Know-Your-Customer (KYC) but in order for any type of fiat conversion, bank accounts. Thus there is a paradox: how can unbanked individuals connect a bank account they do not have to a platform that requires it? This question is never answered in the book yet it represents the single most difficult aspect to the on-boarding experience today.
Thus contra, Dourado and others, Bitcoinland has recreated all of the same types of intermediaries as the traditional financial world, only with less oversight and immature financial controls.
In terms of “rebittance,” in practice, what ends up happening in these emerging markets is that local residents attempt to cash out into their local currency, irrespective of whatever cryptocurrency funds were originally sent with.14 It is highly recommended that readers peruse analysis below in the notes from Yakov Kofner who studies this at SaveOnSend — looking at actual data such as margins and fees15 And again, maybe this will slightly change through the efforts of Align Commerce, Coins.ph and BitX but it has not yet.
Continuing Dourado writes:
We will finally have a unified global financial system to which everyone will have access. Capital controls will become impossible, or nearly so.
Unlikely via Bitcoin, perhaps through other distributed ledger systems being developed (with mintettes). The above statement may be the hopes and dreams of many Bitcoin investors, but recall the drama surrounding Coinbase this past February when the leaked pitch deck (pdf) — which highlighted Bitcoin’s ability to bypass sanctions on Russia — ended up in the hands of regulators. The head of compliance at Coinbase ended up leaving and the startup was on thin ice (maybe still is?).16
Another quibble with Dourado’s piece is based on his statement:
So in order to do apples-to-apples comparisons, we might want to examine other systems of final settlement. One such system is cash. Cash of course has some limitations, chief among them that it is not possible to send cash online without an intermediary.
The problem with this is that cash in the real world is given exception to nemo dat and bitcoin is not. I tried pointing this out to him on Twitter, to which he responded with one word: “Absurd.” Nemo dat is the legal rule that states that Bob cannot purchase ownership of a possession from Alice if she herself does not have title to the possession.
And it is not absurd.
In fact, as described two months ago, when talking to attorneys such as Amor Sexton, Ryan Straus and George Fogg we learned that one of the problems facing bearer instruments like bitcoin is that many of these virtual assets do not have clean title — that they are encumbered. What this means is that while the Bitcoin network itself may provide settlement with respect to the transfer of private key credentials, on the edges of the network in the social ‘wet code’ world, the title to these credentials could be non-final.
This means that because of how trusted third parties such as Xapo or Coinbase originally pooled and commingled (e.g., did not segregate) customer deposits, some customers may unknowingly end up with encumbered bitcoins. Whether anyone litigates on this issue may be a matter of time as Mt. Gox may have practiced the same behavior with pooled deposits.
Ignoring this could impact the bitcoins you may have. Did you mine the coins yourself or did you buy them through an OTC provider like Charlie Shrem? There is currently no method of “cleansing” these virtual commodities from previous claims. Thus, as described earlier in this post, while settlement finality is a potential benefit of distributed ledgers, it probably needs to be integrated within the current custodial framework in order to be effective. 17
Machine to machine
My last quibble regarding Dourado’s piece is where he states:
Direct settlement also means that machine-to-machine transactions will be possible without giving your toaster a line of credit or access to your full bank account. What new inventions will people create when stuff can earn and spend money?
The core innovation around Bitcoin are censorship-resistant cash and its decentralized ledger — thus trying to merge costly pseudonomity with the KYC of a traditional financial system and then innovate on top of that seems like a one step forward and then one step back.
Therefore it makes little sense for why Dourado, Antonis Polemitis, 21inc and others continue to bring up machine-to-machine as if it is the “killer app” for Bitcoin. What is the need for proof-of-work in these cases? I briefly looked at this in Appendix B: why can’t prepaid cards be used to pay for the same service? If parties — or washing machines and toasters — are known, what benefit does this asset provide that cannot be done with other systems? Why do you need to insert censorship-resistant virtual cash in a transaction that ultimately will need national currency on both sides of the transaction?
Furthermore, even if machine-to-machine transactions somehow did take off and the Bitcoin blockchain was used, it would quickly become bogged down due to block size issues. For more on this point, it’s worth reviewing the two most recent posts from TradeBlock below in the notes.18
It is unlikely that many early adopters or those who believe static money supplies are a feature, will find any of the discussion above of merit.19 Yet, as Noah Smith pointed out again yesterday, bitcoin’s volatility may need to become “boring” (non-existent) if it ever were to become a viable medium-of-exchange. However as described above, there are multiple external factors for why this may not occur including the fact that there is no current method to automatically, trustlessly rebase the purchasing power in Bitcoin.
Last fall Robert Sams published a short paper (pdf) proposing one solution, via a “stable coin” — an idea that has subsequently been explored by Ferdinando Ametrano20 and may eventually be emulated in projects like Augur and Spritzle.
Whether or not this feature is adopted by the Bitcoin community remains and open question. What is probably not an open question is whether volatility will ever disappear for a perfectly inelastic money supply, particularly one without a type of rebasement mechanism.
[Acknowledgements: thanks to Raffael Danielli, Justin Dombrowski, Yakov Kofner and George Samman for their feedback.]
- See What is the “real” price of bitcoin? and Too Many Bitcoins: Making Sense of Exaggerated Inventory Claims [↩]
- I would like to thank Justin Dombrowski for bringing this point to my attention. [↩]
- Readers may be interested in Low Volatility and The Shanghai Composite Are Killing Bitcoin by Arthur Hayes. Note that you can have liquidity from underlying demand as a transactional cryptocurrency, but that does not seem possible to coordinate with a limited, decentralized money supply in the Bitcoin model. [↩]
- The Goldman Sachs report used self-reported numbers from the exchanges themselves. See 80% of bitcoin is exchanged for Chinese yuan from Quartz. [↩]
- I would like to thank Justin Dombrowski for this insight. [↩]
- See New CoinDesk Report Reveals Who Really Uses Bitcoin as well as the the leaked Coinbase pitch deck (pdf). [↩]
- See The flow of funds on the Bitcoin network in 2015 and A gift card economy: breaking down BitPay’s numbers [↩]
- See: Consensus-as-a-service as well as No, Bitcoin is not the future of securities settlement by Robert Sams and On the robustness of cryptobonds and crypto settlement by Izabella Kaminska [↩]
- See also: Will colored coin extensibility throw a wrench into the automated information security costs of Bitcoin? and Can Bitcoin’s internal economy securely grow relative to its outputs? [↩]
- See Too Many Bitcoins: Making Sense of Exaggerated Inventory Claims [↩]
- See Daily FX volumes hold above $5 trillion in Feb-CLS from Reuters [↩]
- George Samman suggested interested readers look at a presentation he made for Coinsetter last week, starting at slide 93. [↩]
- A simple explanation of fees in the payment card industry and Why the payment card system works the way it does – and why Bitcoin isn’t going to replace it any time soon both from Richard Brown [↩]
- See The Rise and Rise of Lipservice: Viral Western Union Ad Debunked [↩]
- Western Union: permanent leader of international money transfer? and Does Bitcoin make sense for international money transfer? both from Yakov Kofner [↩]
- In addition, while an organization like a government may not be able to totally eliminate Bitcoin itself, they could likely severely reduce its use by imposing such absurd punishments that most would fear to use it. But that is a topic for another post. [↩]
- See also: No, Bitcoin is not the future of securities settlement by Robert Sams [↩]
- Bitcoin Network Capacity Analysis – Part 3: Miner Incentives and Bitcoin Network Capacity Analysis – Part 4: Simulating Practical Capacity from TradeBlock [↩]
- This concept, of static money supplies, is not an unknown idea for central banks. David Andolfatto, VP at the St. Louis Federal Reserve, pointed this out in his presentation last month. [↩]
- Slides and video from Ametrano’s March 2015 presentation [↩]
Yesterday at the MoneyConf in Belfast, BitPay’s CEO Stephen Pair announced that they were pivoting away from payments and towards technological infrastructure for banks and enterprises.
This is an interesting announcement in that a year ago, almost to the day, I published an article, A Marginal Economy versus a Growth Economy, that mentioned how on-chain transaction volume was not following the growth in merchant adoption. That it was relatively flat. Reddit and parts of the Bitcoin community derided that analysis yet the data was correct.
In fact, on-chain data later showed that BitPay volume plateaued throughout last year, see The flow of funds on the Bitcoin network in 2015 and A gift card economy: breaking down BitPay’s numbers.
What kind of tech does BitPay currently offer the marketplace?
- ChainDB, introduced in March, though it seems a bit late to the party already started by ErisDB (and from Ripple’s NuDB).
- Copay is in a packed group of multisig offerings including GreenAddress, BitGo and CryptoCorp.
- Insight was their first API / blockchain explorer but everything has moved over to Bitcore.
- Bitcore competes with BlockCypher, Chain, Coinkite, Gem.co, Block.io and others.
- (Their API also has some kind of payment channel which could compete with the Lightning Network)
- Foxtrot seems to also compete with IPFS (and perhaps to some degree Filecoin and DNSChain from okTurtles).
Social media has recently been filled with other hype and rumors but no other big product lines have been announced (yet).
There are a couple open questions. How will they scale and monetize to a new customer base after such a large pivot in an increasingly competitive fintech market?
For instance, they built their company around consumer payments, but they have let about 20 people go over since the Bitbowl, including the Bitbowl team in large part because consumers as an aggregate did not spend bitcoins (their developer evangelist just left recently too).
For example, in his interview with Business Insider, Pair stated that:
We keep adding merchants – we’re up to over 60,000 now — but they’re selling to the same pool of Bitcoin early adopters. At Bitpay we’ve never thought there’d be this overnight adoption where you get people using it this year or even next year. It’s going to take some time. In the industry there’s a realisation that yes it’s an incredible technology but it’s going to take a while for it to mature.
Again, based on demographic research from CoinDesk and others the typical “owner” of a bitcoin is a North American male in their early 30s that is not living hand-to-mouth.1 They likely have a low-time preference and long-term time horizon and thus are unlikely to spend bitcoins because they view it as an investment, not virtual cash.2 Another data point: in moving to Switzerland, Wences Casares noted that 96% of the customer deposits on Xapo do not move, that they are stagnant.
But Xapo is primarily storage right? Why would customers frequently move their deposits in and out of bunkers?
Above is the off-chain transaction chart over the past year at Coinbase. Up until recently it has been relatively flat with around 3,500 – 4,000 transactions per day. In October 2014, Brian Armstrong and Fred Ehrsam, co-founders of Coinbase, did a reddit AMA. At the 31:56 minute mark (video), Fred discussed merchant flows:
One other thing I’ve had some people ask me IRL and I’ve seen on reddit occasionally too, is this concept of more merchants coming on board in bitcoin and that causing selling pressure, or the price to go down. [Coinbase is] one of the largest merchant processors, I really don’t think that is true. Well one, the volumes that merchants are processing aren’t negligible but they’re not super high especially when compared to people who are kind of buying and selling bitcoin. Like the trend is going in the right direction there but in absolute terms that’s still true. So I think that is largely a myth.
Echoing Pair’s view, in a March 2015 interview with CoinDesk, Steve Beauregard, CEO of GoCoin, a payment processor stated:
“I believe merchants have been widely disappointed by the number of transactions they see in bitcoin,” Beauregard said. He went on to state that “consumer adoption is the problem”, speaking out against the ‘if you build it they will come’ mentality of the bitcoin ecosystem in past years.
Thus it is unsurprising that a company, BitPay, that in public previously stated it would generate revenue via transaction and SaaS fees, was unable to in a market filled with stagnant coins. Behind the scenes, as described later below, they were telling people (and investors) that they hoped to generate money via the market appreciation of bitcoins themselves.
Is it the only explanation?
Last month Moe Levin, former Director of European Business Development at BitPay, was interviewed by deBitcoin, below is one detailed exchange starting at 1:57m:
Q: There was a lot of stories in the press about BitPay laying off people, can you comment on that?
A: Yea, what happened was we had a high burn rate and the company necessarily needed to scale back a little bit on how many people we hired, how many people we had on board, how much we sponsored things. I mean things were getting a little bit out of hand with sponsorships, football games and expansion — more care needed to be put on how and where we spent the money.
Q: Can you elaborate on the burn rate? Tim Swanson wrote a piece on BitPay in April, published this piece about the economy, the BitPay economy. Posted this piece on the burn rate and actual figures, have you read that piece? Can you comment on that?
A: Yes, it is especially hard for a company to build traction when they start off. Any start up is difficult to build traction. It’s doubly hard, the hardness is amplified when a company enters a market with competitors that have near unlimited resources because the other companies can either blow you out of the water or have better marketing strategies or they can do a ton of different things to make your startup more irrelevant. Standard in any company but it is doubly difficult when you enter a market like that. In the payments industry, forget about Bitcoin for a second, in the payments industry and the mobile commerce, ecommerce, company-to-company payments industry there are massive players with investments and venture backed companies in the billions.
Competing at that stage is tricky and it necessarily requires a burn rate that is much higher than the average startup because of how you need to compete in this space. What is also important is that the regulation costs a lot of money for the startups in the Bitcoin economy. It’s the perfect storm of how a startup will be hit with a ton of expenses early on and that can hurt the growth of a company. Even though a lot of the money that went into it was growth capital it takes a while to get the balance right between spending and growing.
I do think this explains some of the pivot but not all of it.
According to AngelList, at the time of this writing there are 1,870 payments startups. Some of these, as Levin stated, are well-funded.
While it likely will not win any friends on Reddit, I think BitPay’s effort to succeed in consumer payments was likely hindered due to the first factor, the fixed inelastic money supply.
As Robert Sams noted in May 2014:
There is a different reason for why we maybe should be concerned about the appreciation of the exchange rate because whenever you have an economy where the expected return on the medium of exchange is greater than the expected return of the underlying economy you get this scenario, kind of like what you have in Bitcoin. Where there is underinvestment in the actual trade in goods and services.
For example, I don’t know exactly how much of bitcoin is being held as “savings” in cold storage wallets but the number is probably around $5 billion or more, many multiples greater than the amount of venture capital investment that has gone into the Bitcoin space. Wouldn’t it be a lot better if we had an economy, where instead of people hoarding the bitcoin, were buying bitshares and bitbonds. The savings were actually in investments that went into the economy to fund startups, to pay programmers, to build really cool stuff, instead of just sitting on coin.
I think one of the reasons why that organic endogenous growth and investment in the community isn’t there is because of this deflationary nature of bitcoin. And instead what we get is our investment coming from the traditional analogue economy, of venture capitalists. It’s like an economy where the investment is coming from some external country where Silicon Valley becomes like the Bitcoin equivalent of People’s Bank of China. And I would much prefer to see more organic investment within the cryptocurrency space. And I think the deflationary nature of bitcoin does discourage that.
Based on talks with several other companies in the same space, it is probably not the last announcement of a pivot out of consumer payments.
A next step
So hire experts in financial services right? It might not be so easy.
How will all the bitcoins sitting on BitPay’s books impact their ability to pivot?
The video above is a clip from an two week old interview with Jason Dreyzehner a UI/UX engineer at BitPay.
After watching that, is BitPay: 1) a payment processor 2) exchange 3) forex trading house 4) asset manager 5) all of the above?3
It sounded like they were all of the above. But perhaps they will just raise another round (downround?), hope for the best and ignore these sunk costs.4
What about banks then?
This quote Pair provided Business Insider is probably not fully accurate:
Banks are desperate to figure out how to apply this technology to mainstream currencies and the likes of Citi, UBS and Santander are all looking at blockchain technology.
I’m not sure what banks Pair has been talking to but from my conversations they are not primarily looking at how to “apply this technology” for currencies. Though perhaps my sample size is too small.
Rather, in my experience, financial institutions are looking at how to use some kind of distributed ledger to achieve a number of goals, namely in reducing cost centers and complexities within the back office and this is (so far) largely unrelated to currencies.
The entrepreneurs view
For perspective I reached out to Alex Waters, CEO of Coin.co, a NYC-based cryptocurrency payment processor. According to him:
In light of recent regulations, and their impact – I see several bitcoin companies pivoting. Payment processing was already a tight margin business when it wasn’t considered an MSB. Now with the regulatory costs involved, it would be a challenging line of business for any startup.
ChainDB and Copay are outstanding, and Bitpay’s open source culture makes them a desirable place to work. The regulatory environment may be a blessing in disguise as it can free some companies from investor and branding pressure. Freeing them to pursue new models.
In addition, when asked how BitPay can pivot into the finance and enterprise sector with a team built around consumer payments, Waters noted that:
I think that’s really challenging. Not only is it a different development skillset to do SaaS, but the existing team may not want to work on that model.
For additional perspective I reached out to Steve Beauregard, CEO of GoCoin. In his view:
I’ve been publicly speaking out for the last year about merchant adoption sharply our pacing consumer adoption. Whereas BitPay is shifting their focus to helping banks settle transactions more quickly, GoCoin has decided to address the problem head-on. Clearly merchants see the value proposition, so the thesis behind our merger with Ziftr is to combine our technologies to provide consumers incentives in the ways they currently expect them. The new merged GoCoin / Ziftr will provide merchants with a digital coupon platform where they can give coins to consumers as incentive to make product purchases. Our wallet will be a hybrid in that it will store tokenized credit cards similar to ApplePay, yet also enable payments with multiple cryptocurrencies including Bitcoin, Litecoin, Dogecoin, tether and zifterCOIN.
While I agree the consumer adoption is not happening at the pace any of the early pioneers believed it would, but we are taking the dog to the fight so to speak to provide the tools to merchants to change the behavior to the safest, lowest cost payment alternative.
In addition I reached out to Nikos Benititis, CEO of CoinSimple, an Austin-based payment processor. In his view:
Tim, your thoughts on the cost of regulation and market size already provide a reasonable framework for explaining the recent developments. What I would like to contribute to those is the issue with the “bifurcation” of the bitcoin startup scene.
The first batch of bitcoin startups, which includes BitPay, is quite different from the second batch. In the first batch, you had entrepreneurs who got support from bitcoin early adopters to launch businesses that helped the ecosystem. In the second batch, you have serial entrepreneurs, running companies like Xapo, Circle and 21e6, who got millions from Silicon Valley VCs. Startups from the first batch have to make tough choices, given that interest in bitcoin (see price) is not what it used to be, and that they have to get “traditional” funding to survive. If they get such funding, like BitPay did, they may have active investors questioning the direction of the company, looking at the market size etc. In other words, the price of bitcoin and the lack of crowdfunding does not allow startups from the first batch, to continue working on “ideological” agendas, like bitcoin merchant and user adoption. Startups of the first batch can continue working on what they started on only if the bitcoin price rebounds, or if large bitcoin holders support them. BitPay had to pivot in order to create a sustainable business because it could not afford to do otherwise.
CoinSimple, that provides a Blockchain.info-style merchant processing, because it never touches customer or merchant funds (unlike Coinbase, or BitPay), continues to try to contribute to wider Bitcoin merchant adoption. With a product that works, and we minimum overhead, we can afford to grow organically and contribute to the growth of the ecosystem.
Whatever the reasons for pivoting were, this is a very fluid market place as companies are still looking to find product-market fits. The next post will look at what Noah Smith and JP Koning have been writing on as it relates to a medium-of-exchange.
Update: according to a new tweet from Stephen Pair: “@BitPay has not pivoted, never even considered it…every line of code we write is about extending our lead in payment processing”
[Acknowledgements: special thanks to Fabio Federici and Pete Rizzo for their feedback.]
- See New CoinDesk Report Reveals Who Really Uses Bitcoin as well as the the leaked Coinbase pitch deck (pdf). Regarding “owning” a bitcoin see Bitcoin Ownership and its Impact on Fungibility from CoinDesk [↩]
- If they believe the future utility (value) of a bitcoin is greater than the value they would receive by using it today, it is rational to hold. For more specifics see Chapter 12 in The Anatomy [↩]
- Based on reliable contacts at large exchanges, BitPay does in fact sell directly to other exchanges. [↩]
- Future researchers may also be interested in valuations. A number of VC-funded Bitcoin companies raised on strong user growth totals in the consumer market so in absence of this, it is unclear how BitPay would show a similar “rocketship: growth in enterprise. How did and how will VCs judge a company that basically sells them on massive user growth that then almost completely evaporates? [↩]
Over the last few weeks a number of posts and interviews on social media have promoted the position that “you cannot separate bitcoin from the blockchain” and that only Bitcoin (and no other distributed or decentralized ledger) is the future of finance.
Others include Jerry Brito, executive director at Coin Center, who recently tweeted:
[The second myth] is that the technology is great, but the currency is not necessary. […] The reason why Bitcoin blockchain is transformative is because it’s a secure ledger and you have the ability to process large amounts of transactions.
The only reason why it is secure and it has that transaction capacity is because you have thousands of miners around the world that have been provided a financial incentive to invest resources, capital to build the facilities that is what makes the ledger secure and gives the protocol the capacity to do transactions.
So if you eliminate the financial incentive which is the currency there is no incentive for miners to mine and thereby you don’t have a secure network and you don’t have the ability to process large amounts of transactions.
Why the “only-Bitcoin” narrative is (probably) incorrect for Financial Institutions
In the other corner, Robert Sams described in detail why Bitcoin will not be the future of securities settlement, Piotr Piasecki explored a couple different attack vectors on proof-of-work blockchains (as it relates to smart contracts) and even Ryan Selkis pointed out a number of problems with the Bitcoin-for-everything approach.
So why is the Bitcoin maximalism narrative at the very top probably incorrect for financial institutions?
Because these well-meaning enthusiasts may not be fully looking at what the exact business requirements are for these institutions.
- What do financial institutions want? Cryptographically verifiable settlement and clearing systems that are globally distributed for resiliency and compliant with various reporting requirements.
- What don’t they need? Censorship resistance-as-a-service and artificially expensive anti-Sybil mechanisms.
The two lists are not mutually exclusive. I published a report (pdf) two months ago that covered this in more detail.
Bitcoin tries to be both a settlement network and a provider of a pseudonymous/anonymous censorship resistant virtual cash. This comes with a very large trade-off in the form of cost: as the network funds mining operations to the tune of $300 million this year (at current market prices) for the service of staving off Sybil attacks.1 This cost scales in direct proportion with the token value (see Appendix B).
The financial institutions that I have spoken with (and perhaps my sample size is too small) are interested in operating a distributed ledger with known, legally accountable parties. They do not need censorship resistant virtual cash or proof-of-work based systems. They do not have a network-based Sybil problem.2
If you do not need censorship resistant as a feature, then you do not need proof-of-work
Recall that one of the design assumptions in the Bitcoin whitepaper is that the validators are unknown and untrusted.
In section 1, Nakamoto wrote:
What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.
And later in section 4:
To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof- of-work system similar to Adam Back’s Hashcash , rather than newspaper or Usenet posts.
Financial institutions operate under completely different conditions. They not only know the identities of their customers, staff and partners but their processing providers are also known, legally accountable entities. There is no Sybil problem to solve for them on the network. There is no need for proof-of-work or $300 million in annual mining costs.
If you don’t need proof-of-work, you don’t need necessarily a token to incentivize validation or secure the network
Instead, validation can be done by entities with contractual obligations that are legally enforced: known validators with real-world identities and reputations.
Permissioned distributed ledgers using this type of known validator, such as Hyperledger and Clearmatics (disclosure: I am an advisor to both), are not trying to be “cryptocurrencies” or even entrants in the virtual cash marketplace.
Nor are they trying to provide pseudonymous-based censorship resistant services. Instead they are attempting to provide a solution for the financial institution requirements above.
But if Bitcoin has the largest user base of pseudonymous virtual cash, wouldn’t concepts like sidechains allow systems like Hyperledger to be run on a sidechain and therefore we should all focus on Bitcoin?
Again, permissioned ledger systems like Hyperledger are not a cyrptocurrency, so sidechains (as they are currently proposed) would probably not provide any benefit to them. Bitcoin may – temporarily or permanently – have the largest mind share for cryptocurrency as whole and for censorship resistant services but this does not seem to really be a top priority for most financial institutions.
Thus, it would be comparable to saying why don’t we connect all Excel workbooks directly onto the Bitcoin blockchain?
Or akin to the Wright brothers trying to sell a biplane to modern day international air carriers. Just because you created the first proof-of-concept and own a lot of equity in the companies in the supply chain for Wright brothers wooden airplanes (because you know aeronautical vehicles is a growth industry), does not mean the first model will not be iterated on and evolved from. Even modern day dirigibles provide different utility than large wide-body air cargo planes.
There is a case to be made that you only need a token as an incentive within proof-of-work-based (and proof-of-stake) cryptocurrency networks. Yet as described elsewhere, there are other ways to build distributed networks and economic consensus mechanisms that do not need follow the Nakamoto design (see Vlad Zamfir’s forthcoming Reformalizing Consensus paper).
Thus, the authors cited at the beginning of this post are likely asking the wrong question. What these writers seem to be collectively saying is: “Hey banks, you want a better settlement method? Then you need Bitcoin.” Instead they should be asking banks, “What problems do you have? Would a censorship-resistant service like Bitcoin’s blockchain sustainably solve that problem?”
Financial institutions each face different problems and challenges but it is unlikely that proof-of-work necessarily solves them.3 Nor is it the case that banks need yet another currency to manage and hedge. Though to be even handed, perhaps other financial institutions like hedge funds will find it useful for speculation.
Blocks and miners
Not to pick on Barry Silbert (this is just an example), but his statement above is wrong: “you have the ability to process large amounts of transactions.”
Bitcoin, with the current 1MB block size, is in theory able to process about 7 transactions per second. If some of the expansion proposals under discussion are enacted, then block sizes may increase to 20 MB in the coming year. This, again in theory, would mean that the Bitcoin blockchain would be able to process about 140 transactions per second.
One bullish narrative has been that Bitcoin will one day be able to handle transaction processing rates on part with networks like Visa (which on average handles 2,000 – 3,000 transactions per second each day).4 For comparison, in 2013 PayPal had 128 million active accounts in 193 markets and 25 currencies around the world and processed more than 7.6 million payments every day.
Baring something like a full roll-out of the Lightning Network, is unlikely to occur without the use of trusted parties.
Thus it is unclear what metric Silbert is using when he references the “large amounts” being processed, because in practice the Bitcoin network only handles about 1.5 transactions per second on any given day, and most traffic is comprised of spam and long-chains transactions and not the actual commerce that Visa handles.
Above are two charts from TradeBlock which recently published some analysis on block sizes and capacity. Based on their analysis and following the current trend in block size usage, the 1 MB capacity will be reached in about 18 months, so only in December 2016 will 2.8 transactions per second be achieved. Dave Hudson ran simulations last year and came to a similar conclusion.
Further, Visa’s network — although centralized — is actually very secure (with moats and all). No one hacks Visa, they hack the edges, institutions like Target and Home Depot. This is similar to Bitcoin, where it is cheaper to hack Bitstamp, Bitfinex, Mt. Gox and countless others (which have all been hacked over the past 18 months), than it is to do a Maginot Line attack via hash rate.
In fact, if we measure adoption and usage by actual end users (i.e., where most transactions actually take place), the adoption is not with Bitcoin’s blockchain, but instead with trusted third parties like Coinbase, Circle, Xapo and dozens of other hosted wallets and exchanges. As I mentioned in my review of The Age of Cryptocurrency, one of the funnier comments I saw on reddit last month was someone saying, “You should try using Bitcoin instead of Coinbase.”
Are permissioned distributed ledgers the solution for financial institutions?
Maybe, maybe not. It depends on if they securely scale in a production environment.. It also depends on the specific business requirements. It could turn out that distributed databases like Chubby or HyperDex are a better fit for some problems.
It is also hard to say that a large enterprise can axiomatically replace its existing systems with a new distributed ledger network and save X amount of money. There are a variety of costs that have to be factored in: compliance costs, reconciliation costs, legal costs, IT costs, costs from capital tied up in slow settlement times, etc. 5 Add them all together and there is, in theory, room for large saving, but this is still unknown. It cannot be derived a priori.
Another common claim is, “Bitcoin is a larger, better supported blockchain and therefore will win out since it has market makers and market support.”
But Bitcoin, as a censorship-resistance payment rail and virtual cash, is a solution for cypherpunks, not for financial institutions who again, have known counterparties. A proof-of-work blockchain only matters for untrusted networks and pseudonymous validators.
It may seem repeitive, but if you are designing a semi-trusted/trusted networks, then the token itself is more akin to a receipt than an informational commodity. Bitcoin, in its current form, likely needs a token because it needs to pay its pseudonymous validators for the censorship-resistance service. If you operate a bank, with a state charter and KYC/AML requirements, this is probably not a must-have feature.
Either way, it is too easy to become caught up in this red herring and miss the utility of a distributed settlement system for the roller coaster ride surrounding the token.
But isn’t using known validation just centralization by any other name?
No, it could be institutionalized (which is different than centralization) in that the nodes are globally separated and controlled by different keypairs and organizations.6 In effect, distributed ledgers are a new, additional tool for financial controls — and an attempt to abuse the network would require additional compromises and collusion that the edges of a proof-of-work networks are also prone to.
Yet in the event an attack occurs on a permissioned ledger, the validators are contractually and legally accountable to a terms of service — pseudonymous validators are not and thus end users for something like Bitcoin have no recourse, legal or otherwise, and are left with options like begging mining pools on reddit.7
Bitcoin may be a solution to some market needs, but it is likely not the silver bullet that many of its promoters claim it is. This is especially true for financial institutions, particularly once the costs of mining and censorship-resistance, is added into the mix.
There is room for both types of networks in this world, just like there is room for dirigibles and jumbo jet freighters. Yet it is impossible to predict who will ultimately adopt one or the other or even both.8
But as shown in the picture below, the Bitcoin mining game (within a game) includes mining pools that are not always incentivized to include transactions.9 Which raises the question: how can you require them to since there is no terms of service?
Every day there is always one or two blocks (sometimes more) that include a lonesome transaction, the coinbase transaction. In fact, in the process of writing this post, F2Pool included no additional transactions in block 359422, this despite the fact that there are unconfirmed transactions waiting for insertion onto the communal chain.
Mining pools have differing incentives as to whether or not to include actual transactions, to them the bulk — roughly 99.5% of their revenue still comes from block rewards so sometimes they find it is not worth processing low fee transactions and instead propagate smaller blocks so as to lower orphan races and instead work on the next hash; see for instance Chun Wang’s comment related to F2Pool and large block sizes posted last week.
I reached out to Robert Sams, CEO of Clearmatics, who has written on this topic in the past. According to him:
To me the crux of the issue is that permissionless consensus cannot guarantee irreversibility, cannot even quantify the probability of a history-reversing attack (rests on economics, not tech).
It’s a curious design indeed where everyone on the Bitcoin network is now known and authenticated… except the transaction validators!
I also reached out to Dan O’Prey, CEO of Hyperledger. According to him:
It all comes down to starting assumptions. If you want the network to be censor-resistant from even governmental attacks, you need validators to be as decentralised as possible, so you need to allow anyone to join and compensate them so they do, so you need to use proof of work to prevent Sybil attacks and have a token.
If you’re dealing with legal entities that governments could shut down then you don’t get past step one. If you’re dealing with a private network between multiple participants then you don’t need to incentivise validators – it’s just a cost of doing business, just as web servers are.
Is that the type of game theoretic situation upon which to build a mission-critical, time sensitive settlement system for off-chain assets with real-world identities on top of?11 Maybe, maybe not. Both types of networks have their trade-offs but focusing on a token is probably missing the bigger picture of meeting business requirements which vary from organization to organization.
[Acknowledgements: thanks to Pinar Emirdag, Todd McDonald, Dan O’Prey, Robert Sams and John Whelan for their feedback.]
- This annualized number comes from the following calculation: money supply creation (1,312,500 bitcoins) multiplied by current market price (~$230). [↩]
- Large institutions and enterprises may have issues with authentication and identification of customers/users but that is a separate operational security issue. [↩]
- It is important to note that if the costs of mining somehow decreased then so too would the costs to successfully attack a proof-of-work network. See The myth of a cheaper Bitcoin network: a note about transaction processing, currency conversion and Bitcoinland [↩]
- Note: In the UK, Visa Europe currently settles over RTGS though Mastercard does not. See: The UK Payments landscape [↩]
- Thanks to Dan O’Prey for his thoughts on the matter. [↩]
- It bears mentioning that having 15 banks in 15 different countries operating validators is more decentralized than a few mining pools in a couple of countries, although it is not a fully direct comparison. [↩]
- In theory on-chain “identity” starts pseudonymously and later users can either fully identity themselves (via traditional KYC, or signing of coinbase transactions) or attempt to remain anonymous by not reusing addresses and through other operational security methods. Miners themselves can be both known and unknown in theory and practice. Other terminology refers to them as a dynamic- membership multi-party signature (DMMS). [↩]
- Peter Todd has argued that financial institutions can take a hash from a permissioned ledger and insert it into a proof-of-work chain as a type of “audit in depth” strategy. [↩]
- According to John Whelan who reviewed this post, “The science of incentives is far more complex than just ‘show me the money’. Indeed, workplace incentive specialists have coined the term ‘total rewards of work’ that recognizes that there are many levers other than compensation that may be pulled to motivate employees to perform at their maximum potential (e.g., workplace rewards). With distributed ledger systems there is a lot of room to gain a clearer understanding of the kinds of incentives that will motivate transaction validators or nodes that offer other services such as KYC/AML, etc. It is definitely not a one-size-fits-all.” [↩]
- For comparison, Litecoin has 245447 blocks with 1 transaction and 105765 blocks with two. [↩]
- At an event in NYC last month Peter Todd opined that perhaps some firms will take this risk and will encode a series of if/then stipulations in the event that a history-reversing attack occurs. [↩]
A reporter from CoinDesk reached out yesterday to ask if there were any questions I had in relation to the final version of the BitLicense being released.
They subsequently posted a follow-up story with one of the comments I sent. Below are the remaining questions and comments that came to mind after quickly reading through the final BitLicense.
The current wording in the final version still seems to leaves a few unanswered questions:
1) When a miner (hasher) sends work to a pool, the pool typically keeps the reward money on the pool before sending it to the miner or until the miner manually removes it. Would mining pools be considered a custodian or depository institution since they control this asset? What if a pool begins offering other services to the miner and these assets remain on the pool? (e.g., some pools have vertically integrated with exchanges) Update: The mining pool BTC Guild has announced it is closing down and citing concerns over the BitLicense with respect to these issues.
2) Are there any distinguishing factors or characteristics for entities that issue or reissue virtual currencies? For instance, both non-profit groups (like Counterparty, Augur) and for-profit organizations (like Factom, Gems) issued virtual currencies and it appears that federated nodes that operate a sidechain, in theory, will effectively (re)issue assets as well. Are they all custodians? In light of the FinCEN enforcement action with Ripple, do these projects need to be filing suspicious activity reports (SAR) as well?
3) How hosted wallets comply with 200.9(c) and whether startups like Coinbase violate that given this UCC filing (pdf)? (E.g., assuming the bitcoins held by Coinbase for customers are covered by the filing, it seems as if it could violate 200.9)
A new story up on Fusion — Former Mt. Gox CEO: Current Bitcoin exchanges are a ‘disaster waiting to happen’ — looks at a recent post from Mark Karpeles regarding the segregation of financial controls within the Bitcoin exchange framework. I provided a couple of quotes for some perspective.
In addition to the snippets in the article, it bears mentioning that I would disagree with his view that it is possible to make a fully decentralized exchange today due to the fact that cash is centrally created and thereupon controlled by a variety of agencies. He is right about the intersection of AML and how some companies are unable (or more likely, unwilling) to legally comply with it due to how they operate (such as LocalBitcoins and Purse.io).
As an aside, virtually most (if not all) VC-funded, US-based hosted wallet and exchange is likely in non-compliance of a variety of custodian/depository regulations though it is unclear if/when any jurisdiction will prosecute them:
One last comment about that story, there may be ways to create financial controls to reduce the ability for maleficence to occur but as Karpeles ironically pointed out (he did not acknowledge it but probably is aware of it), by converting bitcoins into an altcoin, you effectively are delinking provenance and creating a money laundering mechanism. Based on a number of conversations with altcoin traders I suspect that a non-negligible portion of the litecoin trading volume on a daily basis (on BTC-e and ShapeShift.io) are related to money laundering type of activities. Though this would be hard to verify and prove without building a good network heuristic and/or access to the server logs at these companies.
See also: CEWG BitLicense comment